Delta talks publicly about its expectation of generating nearly $7 billion from American Express this year, and that it has a goal to stretch this to $10 billion. And because of this, it’s commonly believed to be the best at extracting revenue from its SkyMiles program. Yet SkyMiles is the least rewarding of the major frequent flyer programs. Its miles are indisputably worth less than competitor currencies. What’s going on here?
- Delta markets itself as shrewder than the competition, but they aren’t really. American AAdvantage is actually competitive with SkyMiles in revenue generation and United is better than Delta at extracting ancillary revenue.
- Right before the pandemic Delta and American Express entered into a new deal, running through 2029, that pays the airline more than ever before. American has been operating under a prior then-record deal. Future AAdvantage performance may have greater upside.
- Delta owns their flying markets more than competitors. United has strong positions in the best markets for credit cards, but not undisputed positions. Delta is generally the preferred brand in New York and is strong in Southern California, while they ‘own’ Atlanta, Detroit, Minneapolis, Salt Lake City… and really the whole of the Upper Midwest. That’s been the result of shrewd decisions running the airline in the past, which has created a brand halo and a lock on facilities. But the airline itself doesn’t perform as well as it used to (the performance gap has narrowed).
A couple of weeks ago IdeaWorks released its 2023 yearbook of ancillary revenue and contains a lot of interesting data.
Frequent flyer programs are a huge driver of profit to U.S. airlines. Delta earned roughly $2.2 billion on SkyMiles out of $2.9 billion in total profit in 2022. At times AAdvantage has accounted for more than the total profit of American. The three largest U.S. airlines borrowed $6.5 to $10 billion apiece backed by their loyalty programs during the pandemic. While disclosures about frequent flyer programs are less extensive than you’d expect, given their significance to each airline, there are some things we can say.
American AAdvantage is believed to have earned more revenue than SkyMiles in 2022. And they’ve previously reported higher margins on that revenue, though this is likely a function of accounting (how the revenue is attributed) rather than actually being a more profitable program as such.
Delta and United earn more ancillary revenue than American does, though – things like bag and seat fees in addition to loyalty program revenue. American is behind the curve merchandising upsells to its customers though it has been working to improve here (much to the chagrin of frequent flyer elites seeking better seats and upgrades).
It’s underappreciated just how good United is at merchandising. United is nearly an ultra low cost carrier in terms of generating non-ticket revenue per passenger. Obviously more of United’s revenue comes from MileagePlus than Spirit’s from Free Spirit. But they charge for more seats and charge more for those seats than competitors, and they sell more bundles and packages of upsells than other airlines. People pay it!
Since airfares are compared and sold on the basis of headline fares, passengers often don’t realize that they may be getting less value from a United ticket (leaving aside the actual slimline seats on United are generally less comfortable and that their internet barely works on domestic flights).
A decade ago executives across the airline industry looked to Delta as the smartest people in the room. They copied Delta’s moves assuming that if Delta did it, it must be smart. That was true even where their businesses were different and it wouldn’t work out as well for them as Delta. Delta has been able to consistently devalue SkyMiles without the same effect on co-brand spend that other airlines have seen.
Delta’s halo has lost its luster. They no longer have the extreme operational competence they had before the pandemic. They no longer have the better inflight product that they had (though their internet is better than United’s and their employees marginally friendlier). They frequently don’t process upgrades at the gate and their catering can be worse than American’s.
Loyalty programs have generally coped Delta, but haven’t gotten quite as far yet, though they’ve gotten closer than sometimes acknowledged.
Delta is not so far ahead in its loyalty program revenue extraction than competitors, though. Airlines without the same market position as Delta wouldn’t do well to copy Delta. And Delta’s position is eroding. We saw the backlash to recently-announced SkyMiles changes that took Delta executives by surprise – they don’t realize how far they’ve fallen.
Other airlines would be wise to look at that, realize there’s a limit to Delta’s revenue extraction, and also that following their own path and not Delta’s gives them an opportunity to leave Delta and SkyMiles in the dust.